EconSouth (First Quarter 2003)

EconSouth (First Quarter 2003)

COVER STORY

The Farm Security and Rural Investment Act, commonly known as the 2002 farm bill, provides welcome supports to Southeastern farmers facing uncertain times. Some opponents to the bill, however, question whether the cost is worth it. What are the current and long-term implications of the evolving agricultural-subsidy picture?

or most Southeastern commodity farmers, the Farm Security and Rural Investment Act of 2002 (farm bill) provides a crucial safety net in uncertain times of lagging global economies and complicated trade considerations. Faced with some of the lowest prices since the Great Depression and a succession of weather-related disasters ranging from drought to deluge, most growers welcome subsidies that will guarantee income even in bad years.

While the 2002 farm bill, which will deliver $16.5 billion in annual farm subsidies, brings immediate and much-needed security for the regions agricultural industry, its implications over the longer haul are less certain. According to University of Georgia (UGA) agricultural economist Don Shurley, the bill overlooks some critical issues. For example, generous target prices for some commodities will also drive up land rents, lowering farm earning potentials for the many growers who lease land (42 percent of farmers nationally in 1999, according to the U.S. Department of Agriculture). As competition for agricultural support increases among regions, Southeastern farmers may have to defend the higher subsidies required to maintain input-intensive crops such as cotton, sugarcane and peanuts, according to UGA economist Nathan Smith.

Without agricultural subsidies, farmers in developing nations are sometimes driven from their own markets  not to mention from export markets  by low commodity prices caused by overproduction and by restrictive tariff arrangements. In the United States, lawmakers trying to avoid these pitfalls find themselves increasingly squeezed by pressures to address global trade issues, meet the needs of their farming constituents and act on national security concerns over the need for safe, reliable food sources.

The difference between bills: 1996 and 2002
Lawmakers crafted the 1996 Freedom to Farm bill to encourage a transition from government-dependent agriculture to a more market-oriented industry. While many supports remained in place in the 1996 bill, including the peanut quota system and sugar provisions, other subsidies were reduced, and spending caps were set at progressively lower levels for each succeeding year. The 2002 bill, which restores a safety net for farmers during adverse growing or economic circumstances, represents a 67 percent increase over what farmers would have received under the 1996 bill (see the table on page 4 for state-by-state comparisons).

According to Larkin Martin, a cotton farmer in Alabama and an Atlanta Fed board member, lawmakers drew up the 1996 bill in an environment of global economic exuberance. Responding to dramatic increases in demand, especially from Asian nations, farmers were poised in the mid-1990s to make money even without supports, and the Freedom to Farm bill seemed like a good idea. But when many Asian economies collapsed, so did farm prices, and the result was a crisis for domestic growers. As plummeting prices combined with weather disasters, farmers were forced to appeal to the government for emergency assistance. Congress allocated more than $22 billion in emergency farm aid between 1998 and 2000.

Though bill opponents are still reeling from sticker shock over the $189 billion that the 2002 bill allocates to farmers over the next 10 years, defenders point out that the amount is not significantly higher than what was included in the 1996 bill if the massive outlays for disaster relief are factored in. The new bill institutionalizes relief from bad times rather than dealing with such eventualities on an ad hoc basis. The bill also provides fixed direct payments and countercyclical provisions to assure farmers of sufficient income to break even, creating a better lending climate. Both provisions may be essential if farmers are to continue doing business. Like the 1996 bill, the 2002 bill allows farmers to grow crops in response to markets rather than fixing production choices in historically established patterns.

In addition to instituting a system of fixed direct payments and countercyclical payments, the 2002 bill adds $2 billion in new conservation programs. Although these funds are pending, they increase by about 80 percent the total funds available to pay farmers to maintain wildlife habitats and wetlands, practice farming techniques that replenish soil and set aside borders and woodlands around agricultural land.

Note: Does not include peanut payments.
Source: Food and Agricultural Policy Institute, University of Missouri

Some economists believe that the conservation measures in the 2002 farm bill will eventually prove to be the most popular aspect of the legislation. According to UGAs Smith, taxpayers and farmers are well disposed to conservation measures, though surveys suggest that farmers in the Southeast are slightly less enthusiastic than those in the nation as a whole.

Another aspect of the 2002 bill that pleases growers  especially Floridas citrus growers, who are under increasing pressures from imports  is a labeling law that requires all products to bear country-of-origin information. Farmers believe that quality, safety and environmental concerns will prompt consumers to choose domestic fruits and vegetables over imported produce.

Farming for peanuts
For peanut farmers Neil and Boyd Hagerson of Albany, Ga., 2002 was not a good year. Drought badly affected the growing season, and torrential rains plagued the harvest. The Hagersons estimate losses at about 1,000 pounds of peanuts per acre. In the middle of what Boyd Hagerson describes as a nightmare season, lawmakers enacted the 2002 farm bill, substantially revamping the peanut program. The bill eliminated the peanut quota system of assistance, which had been in place since 1937 and had guaranteed a certain price per ton for peanuts grown under strictly managed quotas. The Hagersons are consulting with the local Farm Service Agency to figure out their options under the new program, but in the meantime they wonder what the future will bring.

Responding to trade pressures to end the quota subsidy, crafters of the 2002 farm bill created a system of supports for peanuts similar to those for other commodity crops, providing fixed direct payments for acreage allotted to peanuts and countercyclical payments to help when prices fall below a certain target. The government is buying out peanut-marketing quota rights at a rate of 55 cents per pound. Quota holders are eligible to receive a lump sum or a series of payments over five years.

According to Smith, a peanut specialist, the buy-out program is equitable for quota holders despite the fact that some opponents of the program think the compensation is too lean. He believes that the buy-out program could increase the farm-level income for Georgia peanut quota holders by as much as $70 million each year for the next five years, but he questions what will happen to peanut farmers when the five-year period ends. Peanut production will probably move from some of its current locations, where dry weather has diminished production, to less drought-stricken regions like southern Alabama and Florida, according to Smith.

While current quota holders can, of course, turn to other crops, UGA agricultural economist Stanley Fletcher points out that peanuts have traditionally been a key card in the farmers hand. In the South, on the farm, peanuts were breadwinners that assured potential profitability, he says, noting that operating loans were easier to secure for farmers who owned part of the peanut quota. Now peanut profits will be subject to the same volatility as other commodity crops.

Ending the quota system will also lower peanut land values  good news for those who work the one-third to one-half of peanut acreage that is rented rather than owned; their rents will likely go down. Landowners who hold part of the peanut quota, however, will see the value of their assets drop. According to Fletcher, the new provisions shift the benefits to producers and away from owners.

Both Smith and Fletcher see plenty of room for peanut farmers to respond creatively. In the past, peanut farmers have lacked programs to foster cooperation among producers, marketers and processors. A more integrated approach could yield higher profits, says Fletcher.

Lurking behind the shift in peanut supports is a complex web of trade issues. The quota system, which specified production levels to anticipate demand and minimized the boom-and-bust cycle that plagues farm production, also created U.S. peanut prices that were higher than those in the world market. As a result, legislators walk a fine line between meeting trade agreement stipulations and keeping U.S. farmers in business. The supports in the new peanut program are designed to keep peanut production from moving offshore, but Mexican peanuts are scheduled to enter domestic markets without tariffs in 2008, and Argentina, now the second-largest producer of human-consumption-quality peanuts, should eventually be eligible for tariff reductions on peanuts as well. Brazil could also shift production to peanuts.

Quality control is another aspect of the peanut puzzle. According to Smith, domestic peanut processors are willing to pay more for peanuts produced in the United States because they believe the taste and quality are superior to peanuts produced abroad. But foreign nations may not be willing to pay higher prices for U.S. peanuts as cheaper peanuts become available, and exports may decline.

Soft markets for cotton
Cotton ties the Southeast regions most rural outposts to the far-flung corners of the globe. Factors such as stalling Asian economies, a dip in the rupee against the dollar, or new synthetic fiber capacity in China can spell trouble for the regions cotton farmers  and indeed they already have.

After robust demand for cotton in the mid-1990s, prices plummeted to a historic low of 28 cents per pound in 1998. Rock-bottom prices coupled with adverse growing conditions left cotton farmers scrambling for emergency assistance under the 1996 farm bill.

No farm in Alabama could survive without benefits, says Martin, who runs a middle-sized cotton farm. I could have farmed maybe two years out of 12. Im not proud of reliance on government benefits, but its a fact.

According to Lester Spell Jr., commissioner of Mississippis Department of Agriculture and Commerce, the 2002 farm bill will bring stability to his states important agriculture industry, which is heavily invested in cotton. But the bill came too late for many of the states farmers, who were not willing to risk another disastrous cotton crop. Mississippis cotton acreage fell nearly 30 percent between 2001 and 2002, according to a National Cotton Council survey, as farmers shifted to soybeans and other more profitable crops.

While the 2002 bill will keep cotton farmers in business, long-term prospects depend on an increase in global demand. U.S. cotton farmers compete with farmers in China and Brazil, who maintain low overhead in land and labor costs and can afford to undercut U.S. producers. The domestic market for U.S. cotton is shrinking as textile manufacturers move offshore. Nevertheless, an upturn in global consumption, which is a possibility as the worlds less economically developed populations gain ground and the U.S. economy moves toward recovery, could make U.S. cotton profitable again.

Another issue for cotton farmers is increasing land rents in the wake of higher support prices. A survey by the Mississippi State Extension Service suggests that the amount of land that farmers rent in the state, as opposed to owning, has increased steadily  from 49 percent in a 1977 study to 68 percent in a 2002 study. Anecdotal evidence indicates that the tendency toward increased land rental exists in other Southeastern states as well.

Shurley, who specializes in cotton economics, finds this development a cause for concern. Its very painful for growers not to realize all of the benefit Congress intended for them because land rent is siphoning it off. We currently have inflation in land rents, and that will continue even more so under this new farm bill.

As regions compete for support resources, some analysts question the wisdom of huge cotton outlays. Martin explains that cotton inputs are high: An acre of corn costs around $150 to cultivate, whereas an acre of cotton costs about $400. Between high inputs and low prices, subsidies to cotton growers seem huge compared to those for other commodities. But Martin argues that most of the money goes back into the local economies, and she sees the supports in the 2002 bill as an important economic stimulus.

Payments come to the farm, but they go right back out again to buy equipment, for processing, grain elevators, trucking and ginning, says Martin, who notes that ginning is an important employer in rural counties across the region.

Cottons multiplier effect is significant, according to a study conducted by University of Tennessee economist Jamey Menard. Tennessee cotton crops that generated approximately $208 million in direct effects also produced over $109 million in indirect effects related to agriculture and nearly $81 million in induced effects related to trade, housing, government and education. A University of Georgia study also indicates that cottons impacts on local economies are significantly larger than those of most other agricultural activities where employment is concerned.

However, these statistics do not impress Green Scissors, a group that advocates trimming waste out of the federal budget in ways that improve the environment. They recommend putting cotton on the chopping block by removing all subsidies. The result would likely be the death of domestic cotton production, and this, says Martin, would compromise national security by making the United States dependent on fiber imports to make clothing and other materials.

Both Martin and Shurley acknowledge that the 2002 bill does not do enough to control overproduction, which in turn leads to low prices. Loan deficiency payments [or LDPs, a commodity payment program] are a two-edged sword, says Shurley. We need them and were glad to have them. But theres no doubt that LDPs keep land in cotton that perhaps could shift to something else. So, while we need them, their very existence continues this low-price, oversupply cycle that is difficult to dig out of.

Sugar, a costly sweet
The 2002 farm bill left sugar supports basically unchanged, and thats good news for Louisiana cane farmers, who had a punishing year in 2001 from hurricane damage. Both harvest and milling costs increased dramatically as a result of the wet weather. Louisiana State University agricultural economist Mike Salassi says that millers had to draw as much as 300 pounds of wet mud out of each ton of cane. Production was devastated, and sugar farmers were forced to deal with losses by securing low-interest loans that basically act as a price support for sugar growers.

The U.S. government lends sugar growers between 18 and 22 cents a pound, thus setting the domestic market price of sugar significantly higher than the world price, which has been as low as 5 cents a pound in recent years. The key component of the U.S. sugar support program is, however, tariffs that bar most imports. The 2002 bill also includes provisions that will limit production in anticipation of market needs, keeping domestic prices strong and stable.

Sugar is a cornerstone of the farm economies of both Louisiana and Florida. In Louisiana it is the largest agricultural engine, bringing in crops worth about $620 million in 2001. Floridas sugarcane crop, which in 1998 (the most recent year for which data are available) accounted for $2.9 billion in output and another $2 billion in value added, falls well behind oranges in producing Floridas agricultural income. Nevertheless, sugarcane stands at the head of field crops, outstripping all the others combined in the number of jobs created, the value of crops and labor, and value added.

The price tag for supporting sugar is steep, however, especially for industrial users who must pay higher prices in the United States than they would elsewhere, says Andrew Schmitz, an agricultural economist at the University of Florida who has studied sugar extensively. He points out that some companies heavily dependent on sugar, such as candy maker LifeSavers, have relocated to Canada, where operation is less expensive. On the other hand, sugar subsidy proponents note that U.S. consumers enjoy stable, though perhaps higher, prices in a market that is otherwise quite volatile.

Like cotton and peanuts, sugar is the subject of sometimes-turbulent trade negotiations. In exchange for maintaining sugar tariffs, the United States agrees to import 1.23 million tons of sugar, much of it from Mexico, in accord with the North American Free Trade Agreement. The imported sugar enjoys the advantage of fetching high U.S. prices rather than the generally lower prices of the world market. However, when domestic overproduction forced the U.S. government to buy up a large amount of sugar last year in an effort to halt plunging prices, imports from Mexico fell short of the quota expectations, creating a tense negotiation climate.

Other major exporters of sugar, the European Union and Brazil, also provide price supports for their sugar crops, and production is expected to swell in 200203, according to Schmitz. The result will be record exports, and this ensures that what some call a dumping market, where export prices are lower than in the home market, will continue through 2003. So the tab for supporting sugar will remain high, causing opponents of the 2002 farm bill to continue questioning whether the cost is worth it.

On the farming horizon
Though agriculture is no longer as critical to the Souths economy as it once was, the importance of the farm industry may extend beyond its apparent dollar value. Economists who study multiplier effects, such as David Mulkey at the University of Florida, believe that the indirect economic impacts of agriculture are larger than they might seem, especially in rural communities where employment opportunities are limited. The 2002 farm bill provides an important economic stimulus in a stalled economy, especially in the Southeasts rural areas. In addition, as Martin points out, the 2002 bill ensures the continuation of a viable domestic agriculture, and this is critical for homeland security  especially in light of the potential for terrorist activity that could threaten the safety of imported food or disrupt transportation of crops from key import markets.

The long-term prospects for agriculture in the Southeast depend on increasing export opportunities driven by higher demand, and higher demand depends on an upturn in the global economy and continuing economic strides for developing nations. Many analysts believe that these economic strides take place more rapidly when agricultural trade barriers are eased.

Farmers, legislators and trade negotiators find themselves in the difficult position of trying to reassemble the agricultural boat amidst high seas of economic change. Agricultural production, like that of other industries, will have to evolve to accommodate the changing realities of the global marketplace. The jury is still out, says Fletcher. If you model (farming) on the last 50 years, you might be in trouble, but if you adapt, all kinds of things are possible.